Trading is not for income!

January 28, 2018

 

 

“A bold statement Tom!”. Maybe but it is what I believe.

 

You may, of course, disagree and that’s fine.

However in this article, I want to explore why I believe this and share that reasoning with you.

 

Everyday other day I come across people asking me what kind of monthly income they can expect from trading/copying on etoro or how they can supplement their current income from trading or produce a new revenue stream or blah blah blah. They are all missing one important point in my opinion and that is Trading is NOT for income, it is for wealth generation.

 

Let me explain why.

Firstly, you should not be trading with money you need or can’t afford to do without.

Now that is out of the way I would like to start with a couple of simple definitions we are going to use.

 

Income - A necessary source of funds required for the day to day sustenance and maintenance of one's lifestyle.

 

Wealth Generation - The consistent and gradual growth of personal equity/wealth over time.

 

So Income is our salary or wage, it is our day job, our career, the thing we have to do each day to make ends meet, and what we spend on our bills, ourselves and others.

 

But wealth generation is our long term goal, it's our savings that we put away, our investments we profit from, the assets we acquire. Most importantly (and what we will cover in a moment) it is the application off and subsequent benefit from compound gain/interest.

 

So let's look at an example of these two ideas applied to a trading account that has been initially funded with $10,000.

Now we are going to have to momentarily suspend  any skepticism and assume we are dealing with two competent traders who consistently return 5% profit a month.

 

Trader A will remove the 5% each month because they are trading to provide income.

 

Trader B will not remove any funds from his/her account, they are trading for wealth generation.

 

Month 1- Both traders make 5% profit as previously discussed.

Trader A and Trader B both have $10,500

Trader A takes his 5% ($500) profit from the account

Trader B Leaves their 5% in the account.

 

Month 2

Trader A withdraws their 5% ($500) leaving $10,000 in their account.

Trader B now has $11,025 in there account.

 

Month 3

Trader A withdraws their 5% ($500) leaving $10,000 in their account.

Trader B now has $11,576.25 in there account.

 

Month 4

Trader A withdraws their 5% ($500) leaving $10,000 in their account.

Trader B now has $12155.06 in there account.

 

And so on and so on….. Let’s move forward a bit in time.

 

End of year 1

Trader A has $10,000 in their trading account.

Trader B has $17,958 in their trading account.

 

End of year 2

Trader A has $10,000 in their trading account.

Trader B has $32,250 in their trading account.

 

Let’s skip a couple of years….

 

End of year 5

Trader A has $10,000 in their trading account.

Trader B has $186,791 in their trading account.

 

And again…...

 

End of year 8

Trader A has $10,000 in their trading account.

Trader B has $1,081,864 in their trading account.

 

On to the end of the decade….

 

End of year 10

Trader A has $10,000 in their trading account.

Trader B has $3,489,119 in their trading account.

 

Trader A has withdrawn an income of $60,000 over 10 years and has $10,000 in his/her trading account.

 

Trader B Has withdrawn $0 income over 10 years and has $3,489,119.86 in his/her trading account.

 

I repeat trading is not for income!

 

Trader B basically has 3.5 Million Dollars!

All it took was to make 5% a month over ten years on an initial investment of $10,000.

 

Obviously this is a very simplified example for several reasons but it serves to make the point about the power of compound interest and why our focus in trading should be wealth generation.

 

It is far more likely that trader A’s account would have actually gone to zero in this time because in reality there would have been winning months and losing months and each time he took his 5% form a losing month he would reduce his equity and gradually over time would bleed the account dry.

Trader B could endure any losing months and his account will still grow over time and in reality could even be at a faster rate than the example depending on average monthly return.

 

You might say “But Tom 5% a month is an unrealistic rate of return” to which I would answer, “You are missing the point!” Ok, run the model with 4% then or 3% whatever! Guess who is doing better over 10 years A or B? I think you know the answer.

 

I don’t want to be crude or offend anyone but in my experience there are two kinds of trader/investor and perhaps even people in this world.

Get rich quick (Stays poor forever)

Get rich slow (Gets rich slow)

 

We all have different goals in life, I am not saying that this is the right way or the only way.

Wealth is no guarantee of happiness and yes of course there is more to life than money, but your trading for a reason and I’m willing to bet money has a at least something to do with it.

 

“Get rich slow” is just one of my many life goals.

 

I want to wake up in the morning knowing that no matter what problems or challenges the world places at my feet, I have the financial resources to cope with them and perhaps even turn them into opportunities.

I want to know that whatever worries or concerns someone brings my way, no matter what issue is important to them, weather its the ice caps melting or the giant panda going extinct or perhaps a friend who can’t pay their rent this month. I'm sat next to a huge pile of cash and if I want to I can reach out to them and help,

or alternatively I can grab a bunch o bills from my mountain of cash stick it in my ears and tell them and their stupid problems to fuck off! Cause I'm rich and quite frankly don’t give a shit!  

 

Either way the goal is to make money, who you are, how you behave and what you do with it is up to you and nobody’s business but your own.

 

Take care all of you and lets get rich slow.




 

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